Economic predictions for 2013

As we turn our backs on 2012 and look instead to the new year, there remain many important economic questions that need answering and problems that need solving.

Annually, the Financial Times interviews leading economists to find out their economic predictions for the coming year. This year, Philip Booth, Editorial Director of the IEA answered a range of questions regarding house pricing, employment and the EU.

To what extent will the UK see a sustained economic recovery in 2013?

It will make a weak recovery – a sustained weak recovery, I believe

For how long can rising employment remain consistent with stagnant output? What might give in 2013?

Employment can carry on rising with stagnant output so long as productivity growth is more or less zero whilst the labour market functions well. The financial and energy sectors are hampered by both government policy and structural change and, in addition to this, higher government spending, taxation and a benefits system with incredibly high marginal rates suggest that there will not be a step change in productivity growth in the next year or so.

As far as the economics are concerned, how much should people worry that Britain might leave the European Union in the years ahead?

This is an issue similar to that of the euro in that the long-term and short-term consequences are in different directions. In the short term, there will be pain from break-up. However, in the long term, the growth in regulation and the dysfunctional nature of the EU political system which makes it very difficult to change damaging policy, suggests that the EU is destined for a long period of economic stagnation. In the long term, the UK may well be better off forging a different relationship, though the one loss would be the reduction in migration that might result.

To what extent are house prices still too high?

I think they probably have room to fall about 20 per cent on average in real terms on current planning policy. If planning policy were liberalised significantly, we could see house prices falling by 30-50 per cent which would bring huge benefits to large portions of the population and a reduction in fiscal pressures, though it would also bring a large wealth loss for those who already own homes.